5 Questions to Consider Before Investing in a Company Vehicle
If driving to clients and job sites is an important part of your business, investing in a company vehicle can be a smart solution.
But owning or leasing a vehicle is different for businesses than it is for individuals, and it’s important to understand all the potential advantages and drawbacks.
To help you make the best decision for you and your team, ask yourself these questions:
1. How Would the Vehicle Be Used?
A company vehicle can offer liability and tax benefits – but remember that a vehicle owned by your business should be used for business purposes only.
If you purchase or lease a vehicle that appears unrelated to your line of work – like a luxury convertible for a landscaping service – that could look suspicious and be scrutinized in an audit. If you or your employees want the freedom to mix personal and business errands and travel, it might be best to drive your personal vehicles and keep track of mileage for reimbursement and tax reporting.
2. Could a Vehicle Boost My Brand?
One of the biggest benefits of a company vehicle is that it can serve as a mobile billboard for your products or services.
If you purchase a vehicle, your options for branding are limitless. If it’s a lease, bear in mind that anything you do to the vehicle will have to be completely reversible by the time you turn it in to the dealership. Even so, you may be able to promote your business with magnetic signs or other graphic elements that your employees might not want to put on their personal vehicles.
3. What Are the Tax Implications?
When you own a company vehicle, you can generally claim tax deductions for most business-related expenses such as gas, tolls, insurance, maintenance, loan interest, and depreciation. Leasing can also provide tax benefits, because you can usually deduct the full amount of a lease payment during the year it’s paid.
However, if you provide a company vehicle to an employee and they use it for personal purposes, those miles may be considered fringe benefit income that must be reported on their W-2. Consult your tax advisor to understand how a company vehicle would impact your business’ taxes, your employees’ benefits, and your overall financial position.
4. What About Liability?
When it comes to liability and insurance, company vehicles have their pros and cons. If the vehicle is owned by a legal business entity (like a corporation or an LLC) your personal liability may be limited. And as a business, you may be able to get favorable auto insurance rates and terms, especially if you’ve covering multiple vehicles at once.
But be aware that if an employee is involved in an accident in the company vehicle – even outside business hours – your company could be held liable. Talk to your insurance agent to explore your options for commercial insurance.
5. What Do My Employees Want?
Now more than ever, business owners are eager to attract and retain top talent. A company vehicle can be a major perk, especially for those who don’t have reliable transportation. And if you’re in an image-conscious industry, a nice set of wheels can help sales reps and other public-facing employees to shine up their personal brand.
But not every employee wants a company vehicle. Many have chosen their own vehicles for specific reasons or don’t want the added responsibility of keeping logs of personal miles and prorating expenses. It pays to ask your current and prospective team members about their preferences.
You Decided to Invest in a Company Vehicle. Now What?
Do you need a fleet? If you need only one or two company vehicles, a traditional auto dealership is usually the way to go. But if you need an entire fleet, you may get the best deal directly from a manufacturer. The number of vehicles owned and operated by your company can also affect your taxes. If you have four or fewer, you can typically determine your deduction by multiplying those vehicles’ mileage by the standard mileage rate that the IRS sets each year. But if you have five or more, you’ll need to keep track of all your actual expenses.
Should you buy or lease? If you’re familiar with the basic pros and cons of buying versus leasing assets, many of these considerations come into play when it comes to company vehicles. Durable goods like vehicles can serve your business for many years and are often good candidates for purchase. But if you think you’ll need the vehicle only for a limited time, a lease is likely the better option. Buying a preowned vehicle can offer savings, but if you need to drive the very latest model, a lease could be more cost-effective.
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As you’re mapping out your next big move, talk to your financial institution.